The last time the U.S. Federal Reserve (Fed) raised interest rates was more than 10 years ago. Now economists expect it will happen again soon. And it’s likely to affect your investments.
When the Fed raises its benchmark interest rates, other interest rates – such as those on home and auto loans, income investments, and credit cards – tend to follow. So if the Fed raises rates this year, as is widely expected by economists, higher rates will ripple through the markets. In just one example, money market fund managers will slowly replace their portfolios with higher-yielding securities – good news for fund holders, as this ultimately will benefit them.
The most significant impact will likely be on your bond investments. The interest rates on bonds with shorter maturities will likely move most; longer-dated bonds will likely be slower to react. But keep in mind the inverse relationship between interest rates and bond prices: as rates rise, bond prices fall. So your bonds could be worth less if you plan to sell them prior to maturity; if you sell at maturity, you will get face value.
That said, there’s time to prepare: For example, consider your credit card debt. Zero percent introductory rates are likely to disappear once the Fed begins raising rates, so if you’re in the market for a low-rate card, you may want to get it now. And, of course, pay it off before the 0% rate expires, as market rates on credit will rise when the Fed moves.
Similarly, it may be wise to stay away from adjustable-rate mortgages. And you may want to review your mutual fund portfolio with your financial advisor. He or she can help you develop a bond strategy, such as bond laddering, which involves purchasing bonds that mature at different times.
You can weather rate changes because – unless the bond issuer defaults – when each bond matures you’ll receive the full principal amount.